annual report 2009
Group Logistics
STRUCTURE AND FUNCTIONS
The Group Logistics division is responsible for managing stock received from suppliers and for distributing it to the group’s stores efficiently and on time.
The group has eight distribution centres (DCs) based near the head office in Cape Town. The group’s entire stock distribution function, including receiving, storage, picking, packing and despatch, takes place from these DCs.
The DCs together with the divisions or operations they serve are as follows:
- Tygerberg DC: Foschini, donna-claire and fashíonexpress footwear; @home and returned goods;
- @homelivingspace DC: @home furniture;
- Ndabeni DC: exact!, Markham and style accumulation (comprising certain partly completed orders);
- Sports DC: Totalsports, sportscene and DueSouth;
- Foschini DC: Foschini, donna-claire and fashíonexpress apparel;
- Jewellery DC: American Swiss, Sterns, Matrix and Foschini division jewellery;
- Cloth Store DC: Fabric for local production of apparel; and
- Shopfitting DC: Shopfitting stock for the group.
OBJECTIVES
The 2009 year had been planned as a year of intense activity for the division and this expectation was not misplaced. Foundation work done in the previous eighteen months by the group’s supply chain project teams was expected to allow the group to reach a stage where the ultimate goal of having a world-class model of supply chain management would come into sight. This progress was largely achieved, as the next section of this report will make clear.
The stepping-stones in this process were seen at the outset of the year as bringing about improved agility, reducing stockholding in the DCs, and reducing lead times from the stage of placing orders for products to the point of delivery of the finished merchandise to the stores.
The beneficial results which are to be brought about in the longer term include a more efficiently co-ordinated order management cycle and the ability to react with speed and precision to changes in buying patterns, which are in effect dictated by changes in fashion. The final result is intended to be increased stock turn and correspondingly increased levels of profit.
GROUP SUPPLY CHAIN INITIATIVE
This project is a fundamental, comprehensive and fully co-ordinated effort to redesign the cycle which underlies ordering, acquiring and distributing merchandise, taking into account the unique structure of the group and exploiting modern information technology and modern approaches to old and troublesome issues in the retail industry. The initiative will necessarily stretch over a multi-year period into the future and will be continuously updated in the foreseeable future.
Targets in stock turn have been set through to 2012, with the final target being substantially higher than the figure for 2009.
The supply chain initiative is best seen as being composed of four essential components in respect of which the past year’s developments are briefly overviewed below.
Supplier relationship management
The group has many suppliers located in South Africa, Asia and elsewhere. If lead times and wastage within the pipeline are to be reduced, highly efficient procedures and reliable supplies of merchandise are needed.
In its efforts to enhance the group’s sourcing capabilities, the supplier relationship management project has reviewed the group’s contract allocation process and sourcing criteria and has developed a ‘group supplier scorecard’. This will measure each supplier in respect of five criteria, being:
- on time and in full delivery;
- DC delivery conformance;
- quality;
- product performance; and
- relationship.
A score will be allocated to each criterion, resulting in an overall rating of the supplier. The goal is to improve supplier reliability and performance and to create a clear, concise and objective measurement process. The division intends to work with suppliers and the group’s own trading and service divisions to bring about improved ratings. The steps necessary to achieve current goals are currently being debated with key suppliers and one of the objectives for the 2010 year and later years is to extend this process to all suppliers of merchandise to the group.
Pipeline
The group is strategically well positioned to take advantage of local sourcing, the existence of the TFGA division and its capabilities being among the key factors in approaching this process. The pipeline project has focused on establishing sustainable, fast-response connections between the Foschini and exact! trading divisions and the TFGA division. The benefits of this improvement, when it has reached maturity, will be transferred to the pipeline with other suppliers.
Notable achievements in the past year were the sourcing of certain test items on a 60-day lead time from styling to store delivery. This gives the group an ability to repeat consignments of best-selling merchandise within the confines of a single season. After the design process had been analysed, thorough internal and external measurement systems were put in place, resulting in lead time for a full cycle being reduced from 180 to 150 days. An objective for the next year is to further enhance the fabric sourcing process and to continue reducing the time expended on the full cycle.
Lead time
This project focuses on all the logistical processes between supply and delivery to store. An average time saving of 29 days was achieved over the course of the year. The objective for the next year is to ensure that the trading divisions’ sourcing processes and calendars are optimised to take full advantage of these time savings.
Replenishment
While the group is a fashion retailer with a fast turnover in styles, it is recognised that there are substantial opportunities for increasing replenishment, which is the process of obtaining replacement stock of items which have been sold out in the stores. In the past year the replenishment project has aligned the group’s replenishment methodologies and identified further product opportunities. In the next year the division will collaborate with the trading divisions in implementing the changes which have so far been identified.
Overall, substantial progress has therefore been achieved during a period of unhelpful economic conditions. Fresh and more ambitious targets and stock turn objectives have been set for each division for the next year. By achieving them the group will position itself favourably not only for the following year, but also enable it to take greater advantage of stronger trading conditions when the business cycle turns upwards.
ADDITIONAL FEATURES OF THE PAST YEAR
In the past year the DCs handled 42 million units (i.e. individual items of stock), which represents a drop of 4,5% in unit volumes from the previous year.
The drop in unit volumes placed pressure on cost per unit efficiency. At the same time volatility in the oil price had the effect of pushing transportation costs upwards. The combination of these factors caused the cost of logistics as a percentage of group turnover to rise to 1,68%, compared with 1,55% in the previous year. These figures take account of depreciation and the costs of industrial engineering, staffing, packaging and outbound transport. Rising transport costs were, however, the main contributor to the increased logistics statistic, with increases in the fuel price causing the average fuel price paid by the group to rise by 35% over the previous year. All other costs remained at the previous year’s level of 0,63% of turnover, reflecting a gain in efficiency despite the reduced unit volumes during a downturn phase in the business cycle.
Salient features of the past year’s activity of the division included the following:
- Improved throughput speed: Stock flows were critically analysed, enabling 69% of stock to flow through the DCs within 4,8 days compared with 17,0 days on average for all stock of the previous year. This was achieved through enhanced order management, causing stock to be delivered closer to the time when it was needed. The group continues to fine-pick the bulk of its stock (i.e. break down a consignment of newly acquired stock into store allocations), and this requires processing time. This topic will again be evaluated in the next year in order to achieve further reductions in time. The @home division achieved a much improved cross dock figure of 30% as against 10% in the previous year. (Cross docking in the Foschini group is the process of processing full cartons through the DC without fine-picking.)
- DC accuracy: The accuracy of fine-picked stock leaving the DCs improved from 98,5% to 99,6% at the level of individual items of stock. This creates reliability in the supply chain to stores and is benchmarked against best-in-class retailers around the world.
- Shipping time: The Group Shipping department carefully reviewed shipping times and reduced them from 42 days to 30 days on average. This comprises time from the foreign port through the Cape Town port to the relevant DC. To achieve this, careful measurement of actual shipping times helped remove unwanted buffer times while retaining reliability. This has a positive effect on stockholding within the DCs.
- Transport billing: The billing mechanism for the group’s outbound road transport was changed from ‘per carton’ to volumetric, allowing greater flexibility in the sizes of shipped cartons. The group had previously been charged a set amount per carton and consequently lost out when stock was shipped in relatively small cartons. The volumetric basis allows the group to ship cartons of various sizes without losing cost-effectiveness.
- Supplier delivery conformance: This factor, measured as the extent to which deliveries conform to the group’s criteria, makes up 20% of the points in the supplier scorecard mentioned above. Suppliers receive clear and comprehensive information concerning the criteria and the measurement procedures. The division expects to see large improvements during the next year which should reduce re-work and improve throughput times and eliminate unnecessary costs.
- Flat packing: All suppliers were moved on to a basis of delivering flat-packed merchandise. In the previous year 14% of stocks of apparel delivered was mounted on hangers. By reducing this figure to zero stock handling was reduced, rendering a contribution to improved throughput speed.
INFORMATION TECHNOLOGY AND OPERATIONAL SYSTEMS
On the systems front, the group acquired the Manhattan Associates Warehouse Management System (WMS) to support its requirement for an agile supply chain, and a start was made on preparations for it to go live in the divisions. The software currently used, Nautilus (known in the marketplace as an early version of Oracle WMS), is self-managed by a team of developers within the Foschinidata division. It will eventually be phased out.
Changes in logistics processes result in a need to change the coding of software, which is time-consuming and relatively expensive. Moving to a best-of-breed WMS with coding support from its supplier will result in much improved responsiveness to adjustments to parameter settings for logistics processes. Optimisation of this function is needed for the group’s transformation of the supply chain.
The supplier of Manhattan WMS has its head office in Atlanta, USA, and uses a company named Supply Chain Junction as its South African agent.
Manhattan WMS is accepted as the leading WMS for the retail industry. After its installation quick responses to supply chain changes can be expected.
The first Manhattan WMS implementation will take place in the Markham division and this is scheduled to take place in July 2009. The system will be implemented throughout the DCs over the next three years.
In the process of improving productivity continuously within the DCs, a project named Best Operating Practices (BOP) was designed and initiated. It is intended to provide a sound world-class foundation for the division’s associates. It covers four major areas, being visual performance management (VPM), teamwork, 6S (health, safety and shop-floor organisation) and problem-solving. By the year-end 70% of the action required to implement the project had been taken, with the remainder scheduled for completion before August 2009.
The major risk associated with the DCs is fire. The risk of fire or at least of extensive fire damage can be mitigated if prudent preventative action is taken. This covers the steps inter alia of training staff members at the warehouses in fire-fighting, undertaking maintenance of fire-fighting equipment, implementing atmospheric detection systems, and installing inter-rack sprinkler systems. Close attention was again given to these issues. Historically the group has been free of fires, but there is no place for complacency.
Generators have been provided at all the DCs in order to avoid or minimise the ill-effects of electricity interruptions.
Security is an important element of the distribution operation, particularly at and near the time of transportation. The group’s DCs are equipped with CCTV cameras and are guarded 24 hours a day. As part of the security procedures, access control systems are in place. The group’s security procedures are extended to its transport partners, who have comprehensive security through a combination of secured premises and satellite-tracked vehicles. Security measures again received close attention in the past year in view of the high incidence of crime in South Africa.
Business continuity plans are in place and they were again regularly tested and reviewed by the group’s risk committee.
OUTLOOK FOR 2010
If oil prices remain at the levels prevailing in the last quarter of the financial year and if the Rand stabilises and retains strength, the group’s efficiency in terms of costs per unit should be better by a meaningful margin than in 2009. The momentum built up in the past should continue to bring about reductions in lead times and stockholding, reflecting a more agile and responsive supply chain. This will result in improved stock turn. Implementation of the Manhattan WMS will provide enhanced agility, as will the adoption of the BOP procedures.
